E-Commerce and Market Competition: Analysis Focusing on Reduced Entry Cost

We analyze the effect of e-commerce concentrating on the reduced entry cost, while most of previous studies on the e-commerce have researched the effect of reduced consumer search cost. First, we construct a new equilibrium under the reduced entry cost, and compare the new one with the original one. The reduced entry cost re-organizes a market via price competition; lower prices offered by firms force less efficient firms to exit the market. Second, we carry out a comparative statics analysis on the size of the entry cost. Under some stronger assumptions, we re-produce all properties (lowered offered prices, reservation prices, and cutoff level for operation) obtained from the equilibrium comparison in the first part, and add one more property; the optimal number of operating firms increases as the entry cost decreases. In Korea, the advent of online bookstores has lowered book prices by 24%, and has promoted market competition.